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    Case No. 11

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    Khristienne Bernabe
    This case involves a dispute between Transfield Philippines and Luzon Hydro Corporation over letters of credit used to secure Transfield's obligations to construct a hydroelectric power plant. Transfield requested an extension of time to complete the project but Luzon Hydro did not grant it. Luzon Hydro then called on the letters of credit, but Transfield objected, arguing the extension request was still pending arbitration. The court ruled that under the independence principle of letters of credit, Luzon Hydro was entitled to call on the letters of credit as the beneficiary since it had complied with the terms, regardless of any disputes in the underlying contract. The court denied Transfield's petition.

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    Case No. 11

    Uploaded by

    Khristienne Bernabe
    38 views3 pages
    This case involves a dispute between Transfield Philippines and Luzon Hydro Corporation over letters of credit used to secure Transfield's obligations to construct a hydroelectric power plant. Transfield requested an extension of time to complete the project but Luzon Hydro did not grant it. Luzon Hydro then called on the letters of credit, but Transfield objected, arguing the extension request was still pending arbitration. The court ruled that under the independence principle of letters of credit, Luzon Hydro was entitled to call on the letters of credit as the beneficiary since it had complied with the terms, regardless of any disputes in the underlying contract. The court denied Transfield's petition.

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    This case involves a dispute between Transfield Philippines and Luzon Hydro Corporation over letters of credit used to secure Transfield's obligations to construct a hydroelectric power plant. Transfield requested an extension of time to complete the project but Luzon Hydro did not grant it. Luzon Hydro then called on the letters of credit, but Transfield objected, arguing the extension request was still pending arbitration. The court ruled that under the independence principle of letters of credit, Luzon Hydro was entitled to call on the letters of credit as the beneficiary since it had complied with the terms, regardless of any disputes in the underlying contract. The court denied Transfield's petition.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    38 views3 pages

    Case No. 11

    Uploaded by

    Khristienne Bernabe
    This case involves a dispute between Transfield Philippines and Luzon Hydro Corporation over letters of credit used to secure Transfield's obligations to construct a hydroelectric power plant. Transfield requested an extension of time to complete the project but Luzon Hydro did not grant it. Luzon Hydro then called on the letters of credit, but Transfield objected, arguing the extension request was still pending arbitration. The court ruled that under the independence principle of letters of credit, Luzon Hydro was entitled to call on the letters of credit as the beneficiary since it had complied with the terms, regardless of any disputes in the underlying contract. The court denied Transfield's petition.

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    of 3

    CASE NO.

    11
    I. SHORT TITLE: TRANSFIELD VS. LUZON HYDRO

    II. FULL TITLE: TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON


    HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND BANKING
    GROUP LIMITED and SECURITY BANK CORPORATION, respondents – G.R.
    No. 146717, November 22, 2004

    III. TOPIC: LETTERS OF CREDIT- KINDS OF LETTER OF CREDIT


    (COMMERCIAL AND STAND BY LETTER OF CREDIT)

    IV. STATEMENT OF FACTS:

    Petitioner and respondent Luzon Hydro Corporation entered into a Turnkey


    Contract3 whereby petitioner, as Turnkey Contractor, undertook to construct, on a turnkey
    basis, a seventy (70)-Megawatt hydro-electric power station at the Bakun River in the
    provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner was given the sole
    responsibility for the design, construction, commissioning, testing and completion of the
    Project. . The contract provides for a period for which the project is to be completed and also
    allows for the extension of the period provided that the extension is based on justifiable
    grounds such as fortuitous event. To secure performance of petitioner's obligation, petitioner
    opened in favor of LHC two (2) standby letters of credit. During the construction of the plant,
    Transfield requested for extension of time citing typhoon and various disputes delaying the
    construction. LHC did not give due course to the extension of the period prayed for but
    referred the matter to arbitration committee. Because of the delay in the construction of the
    plant, LHC called on the stand-by letters of credit because of default. However, the demand
    was objected by Transfield on the ground that there is still pending arbitration on their
    request for extension of time.

    On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for
    temporary restraining order and writ of preliminary injunction, against herein respondents as
    defendants before the Regional Trial Court (RTC) of Makati.Petitioner sought to restrain
    respondent LHC from calling on the Securities and respondent banks from transferring,
    paying on, or in any manner disposing of the Securities or any renewals or substitutes
    thereof. The RTC issued a seventy-two (72)-hour temporary restraining order on the same
    day and it was also extended later on.

    The RTC denied petitioner's application for a writ of preliminary injunction. It ruled that
    petitioner had no legal right and suffered no irreparable injury to justify the issuance of the writ.
    Employing the principle of "independent contract" in letters of credit, the trial court ruled that
    LHC should be allowed to draw on the Securities for liquidated damages. Dissatisfied with the
    trial court's denial of its application for a writ of preliminary injunction, petitioner elevated the
    case to the Court of Appeals via a Petition for Certiorari under Rule 65. The appellate court
    dismissed the petition for certiorari expressing conformity with the trial court's decision that
    LHC could call on the Securities pursuant to the first principle in credit law that the credit itself
    is independent of the underlying transaction and that as long as the beneficiary complied with the
    credit, it was of no moment that he had not complied with the underlying contract.

    V. STATEMENT OF THE CASE:

    Subject of this case is the letter of credit which has evolved as the ubiquitous and most important
    device in international trade. A creation of commerce and businessmen, the letter of credit is also
    unique in the number of parties involved and its supranational character.

    Petitioner has appealed from the Decision1 of the Court of Appeals in CA-G.R. SP No. 61901
    entitled "Transfield Philippines, Inc. v. Hon. Oscar Pimentel, et al.," promulgated on 31 January
    2001.

    VI. ISSUE:

    Whether or not the "independence principle" on letters of credit may be invoked by a beneficiary
    thereof where the beneficiary's call thereon is wrongful or fraudulent

    VII. RULING:

    In a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable,
    there is a definite undertaking by the issuing bank to pay the beneficiary provided that the
    stipulated documents are presented and the conditions of the credit are complied with. Precisely,
    the independence principle liberates the issuing bank from the duty of ascertaining compliance
    by the parties in the main contract.  As the principle's nomenclature clearly suggests, the
    obligation under the letter of credit is independent of the related and originating contract.  In
    brief, the letter of credit is separate and distinct from the underlying transaction. To say that the
    independence principle may only be invoked by the issuing banks would render nugatory the
    purpose for which the letters of credit are used in commercial transactions.  As it is, the
    independence doctrine works to the benefit of both the issuing bank and the beneficiary.
    Letters of credit are employed by the parties desiring to enter into commercial transactions, not
    for the benefit of the issuing bank but mainly for the benefit of the parties to the original
    transactions.  With the letter of credit from the issuing bank, the party who applied for and
    obtained it may confidently present the letter of credit to the beneficiary as a security to convince
    the beneficiary to enter into the business transaction.  On the other hand, the other party to the
    business transaction, can be rest assured of being empowered to call on the letter of credit as a
    security in case the commercial transaction does not push through, or the applicant fails to
    perform his part of the transaction. 
    Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that
    the settlement of a dispute between the parties is not a pre-requisite for the release of funds under
    a letter of credit.  In other words, the argument is incompatible with the very nature of the letter
    of credit.  If a letter of credit is drawable only after settlement of the dispute on the contract
    entered into by the applicant and the beneficiary, there would be no practical and beneficial use
    for letters of credit in commercial transactions.
    Respondent banks had squarely raised the independence principle to justify their releases of the
    amounts due under the Securities.  Owing to the nature and purpose of the standby letters of
    credit, this Court rules that the respondent banks were left with little or no alternative but to
    honor the credit and both of them in fact submitted that it was "ministerial" for them to honor the
    call for payment.
    Of course, prudence should have impelled LHC to await resolution of the pending issues before
    the arbitral tribunals prior to taking action to enforce the Securities. But, as earlier stated, the
    Turnkey Contract did not require LHC to do so and, therefore, it was merely enforcing its rights
    in accordance with the tenor thereof.  Obligations arising from contracts have the force of law
    between the contracting parties and should be complied with in good faith.

    VIII. DISPOSITIVE PORTION :

    WHEREFORE, the instant petition is DENIED, with costs against petitioner.

    Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days
    from notice.

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